Current account deficit to widen to USD 30 billion in FY2018, says ICRA

New Delhi [India], Mar 9 (ANI): Credit rating agency ICRA in its report noted that it expects higher oil and gold imports to enlarge India's current account deficit to ~USD 30 billion (1.2 percent of GDP) in FY2018 from ~USD 20 billion in FY2017 (0.9 percent of GDP), arresting the trend of moderation recorded for four consecutive years since FY2014. However, the pressure related to the financing of a larger current account deficit would abate with the resumption of NRI deposits in FY2018.

"ICRA expects a rise in the prices and import volumes of crude oil and gold to enlarge the Indian current account deficit to ~USD 30 billion in FY2018 from ~USD 20 billion in FY2017. While merchandise exports may rise by five to six percent in FY2018, partly led by the higher value of commodity-intensive exports, global trends do not augur well for a significant improvement in the services trade surplus and remittances in FY2018," said principal economist ICRA, Aditi Nayar.

"Since FY2014, a combination of lower crude oil and/or gold imports has helped curtail India's current account deficit, absorbing the impact of declining merchandise exports, services trade surplus or remittances in some of these years. This cushion would not be available in FY2018," added Nayar.

ICRA's baseline projection factors in a rise in the average crude oil price to USD 55/barrel in FY2018 from ~USD 48/barrel in FY2017, and a seven percent uptick in import volumes on the back of sustained domestic demand.

Accordingly, net oil imports are expected to expand by 24 percent to ~USD 67 billion in FY2018 from ~USD 54 billion in FY2017, emerging as the chief driver of the anticipated widening of the current account deficit.

The behavioral changes in purchase of gold after the note ban remain somewhat unclear. At present, ICRA expects a modest rise in imports in FY2018 relative to FY2017, particularly if healthy agricultural output boosts rural demand. Assuming an average gold price of USD 1,250/troy ounce, the value of gold imports in the coming fiscal is likely to increase by 17 percent to USD 28 billion from USD 24 billion in FY2017.

After falling by nearly 40 percent during April 2016-January 2017, the imports of fertilizers and fertilizer raw materials are expected to rise marginally to USD 5.4 in FY2018 from USD 5.3 billion in FY2017, with a decline in volumes of di-ammonium phosphate (DAP) and muriate of potash (MOP) likely to offset a rise in prices.

Coal imports have risen by nearly six percent on a year-on-year basis during April 2016-January 2017. With global coal prices cooling off after the recent spike, and a likely five percent decline in import volumes, ICRA expects the value of coal imports to ease by US$1 billion to USD 13.6 billion in FY2018.

The outlook for exports remains subdued, given the global political landscape, especially the upcoming elections in major European countries, Brexit negotiations and the US trade policy. Such uncertainty may curtail the growth of India's merchandise exports in the coming quarters, despite the rise in the value of commodity-intensive exports. Moreover, the focus of the new US administration on promoting domestic industry and the proposed changes to the H1 B visa regime could hamper the growth of India's services exports.

In addition, the recent appreciation of the INR is likely to weigh on the competitiveness of Indian exports in the coming quarters.

ICRA expects merchandise imports to expand by seven to eight percent to ~USD 415 billion and merchandise exports to rise by five to six percent to ~USD 290 billion in FY2018, widening the trade deficit to ~USD 125 billion from USD 114 billion in FY2017. Global trends do not augur well for a significant improvement in the services trade surplus and remittances in FY2018, from the levels in FY2017. Accordingly, ICRA expects the current account deficit to widen to USD 30 billion (1.2 percent of GDP) in FY2018 from ~USD 20 billion in FY2017 (0.9 percent of GDP).

NRI deposits recorded an outflow of USD 15 billion in April-December 2016, following the redemption of the FCNR(B) deposits raised in 2013.

ICRA expects a turnaround in FY2018, with inflows of USD 12-15 billion from this source. Resumption of NRI deposit inflows, along with sustained healthy FDI flows, would abate the pressure related to the financing of a larger current account deficit in FY2018. However, a high likelihood of tightening by the US Federal Reserve in its upcoming meeting, and the possibility of a hawkish outlook for future rate hikes, may limit the extent of FII inflows into emerging markets like India in the coming months. (ANI)